- Acting fast
- Maintaining control
- Improving your standing with vendors
- Boosting cash flow
Creating opportunities to protect and grow your business takes a combination of preparation, timing, and a little luck. When you are faced with unexpected challenges-- or a chance take a big step -- you don't want to be caught financially unprepared. Instead of looking under the proverbial couch cushions for change to help meet a short-term risk, build a financial buffer that helps you assess a new opportunity from a position of strength.
Establishing and consistently using a revolving line of credit for short-term or unpredictable needs can help your business react both quickly and responsibly when threats appear or opportunity knocks.
Imagine a situation that upends international commerce and could result in loss of business or liquidity. On the other hand, what if a competitor leaves one of your suppliers in the lurch with an unpaid order, available at a discount if you can act fast? Or you see a partnership opportunity that could give your business a lift in stature and prominence but needs a sponsorship fee. These expenses might fall outside the normal boundaries of your day-to-day cash flow, but that doesn't mean they should be overlooked. Having a revolver means being able to say “yes" to both challenges and opportunities. Consider these other benefits of maintaining an open revolver in good standing.
The Ability to Act Fast
An open revolving line of credit allows you to address short-term needs quickly.
Although financial innovations have reduced delays in recent years, applying for a traditional business loan still takes time. By time the application is complete and an underwriting decision comes back from a lender, a surprise opportunity might pass you by.
Avoid the “Founder's Dilemma"
If the outlook is daunting, or an opportunity looks too good to pass up, money is tight, and the window is closing, it can be too easy to raise funds in a very costly way. Without an open revolver, a push to raise money fast could mean giving up equity in your company, and that could later lead to a loss of control. A Harvard Business Review analysis concluded that at least half of entrepreneurs “are forced to step down from the CEO's post," and that most lose their perch due to investor pressure.
Respond to Vendor Pressure for Faster Payment
Especially when the economy is uncertain, suppliers looking after their own cash flow and credit instruments are actively interested in working with buyers who can help reduce the often lengthy gap between delivery and payment. Using a revolving line of credit for short-term purchases can improve your standing with vendors and provide tangible rewards as well. According to a Zogby Research/WEX survey, 82% of business buyers benefit from some form of early payment discounts.
Instill Financial Discipline
Evidence suggests that lines of credit provide long-term benefits to a company's financial health. As researchers Cem Demiroglu and Christopher James write, “lines of credit entail commitments to provide firms with liquidity only when valuable investment projects arise, which helps overcome managerial agency problems associated with holding cash[...] in most cases, cash earns less than the debt used to fund it."
Establishing a revolver with a sweep provision can also help keep short-term cash balances in check by automatically sending free cash flow to pay down the revolver's debt. According to the Corporate Finance Institute, this feature “minimizes the credit risk and liability that comes from a company burning through its cash reserves for other purposes, such as making large, excessive expenses."
Banks are ready and willing to extend revolving lines of credit to meet short-term needs.
Every business has both known and unforeseeable short-term funding needs. A revolver is a powerful yet simple way to meet that demand while strengthening your relationship with a bank. A study of 620 lines of credit over a 20-year period concluded “connected borrowers can obtain larger amount of credit lines with lower drawdown rates than unconnected firms."
Ready To Help
Want to avoid the cash crunch? Improve your short-term capital availability? Get some fresh perspectives on the types of funding gaps a revolving line of credit can close? PNC can help. Visit pnc.com/cib or contact your relationship manager.